2018 was a very difficult year for the shipping sector. Investors dumped shipping stocks as trade war fears and tariffs made headlines. The oil tanker shipping sector was especially hard hit as tanker rates hit record lows. Oil prices surged in 2018 before crashing in Q4. Relatively high oil prices for much of the year reduced demand marginally. Oil also was in backwardation for the first three quarters of 2018. There's a disincentive to store oil when future prices are lower than the current price. Backwardation reduces the demand to ship oil as inventories are drawn down.
Tsakos Energy Navigation Limited (NYSE:TNP) proved to be a remarkably resilient company during the dark days of 2018. A healthy mix between short-term and longer-term charters helped TNP to survive the downturn. The company also wisely built up a huge cash hoard during better times. TNP stock was down in 2018, but held up far better than peers such as Navios Maritime Acquisition Corporation (NNA) that rely more heavily on shorter-term spot rate charters.
Fortunately, the dark days for the tanker sector ended in Q4 as oil prices crashed and oil futures moved into contango. China began rebuilding inventories, and shipping rates soared. TNP reported a loss of $38 million for the first nine months of 2018 as compared to a $19 million profit for the same period in 2017. Despite these poor results, TNP management was very upbeat on the Q3 earnings conference call. They were thrilled at the huge jump in tanker shipping rates and rates have remained at favorable levels.
Surprisingly, preferred stock investors don't seem to have noticed this dramatic improvement in business conditions. TNP.PE still offers a hefty 11.2% yield. In fact, TNP has five different high-yielding preferred stock issues. This article compares the different features offered by each of the preferred stock issues and provides six reasons to consider them.
The traditional preferred stock issue
Tsakos Energy Navigation Ltd 8 3/4 % Cum Red Perp Pfd Shs Series D (TNP.PD) is a par $25 cumulative preferred issue with an 8.75% coupon. Dividends are paid quarterly and TNP.PD now yields 10.2% at a recent price of $21.53. TNP.PD is a perpetual issue, which means that the company is not required to call it. The company has the option to call TNP.PD at par any time after 4/29/2020. See prospectus for additional details. Average daily trading volume is typically around 14K shares. Use limit orders and patience when trading. There are 3.4 million shares of TNP.PD outstanding which equals $85 million par value. All of the TNP preferred stock issues pay qualified dividends that are taxed at a favorable rate. TNP is a corporation and does not issue K-1's to investors.
The "failure to redeem" preferred stock issues
Tsakos Energy Navigation Ltd 8 % Cum Red Perp Pfd Shs Series B (TNP.PB) and Tsakos Energy Navigation Ltd 8 7/8 % Cum Red Perp Pfd Shs Series -C (TNP.PC) are what's commonly known as "failure to redeem" preferred stock. There are very severe penalties if these issues are not redeemed by a certain date. This results in TNP.PB (see prospectus) and TNP.PC (see prospectus) trading more like short-term debt maturities than like traditional preferred stock issues. TNP.PC and TNP.PC are both relatively small issues. There are only 2 million shares outstanding or $50 million in par value outstanding for each issue. TNP.PB has an 8% coupon and TNP.PC has an 8.875% coupon.
The failure to redeem date is 7/30/2019 for TNP.PB and 10/30/2020 for TNP.PC. The coupon will increase by a factor of 1.25X for each quarter of delay beyond the "failure to redeem date" up to a maximum rate of 30%. For example, a six-month delay in redeeming TNP.PB would result in the coupon increasing to 8% * 1.25 * 1.25 = 12.5%. TNP is sitting on $232 million in cash and will be generating more cash thanks to the recent spike in tanker rates. It's extremely likely that the small TNP.PB and TNP.PC issues will be redeemed by their "failure to redeem" dates so as to avoid these draconian penalties.
The fixed to floating rate preferred stock issues
Tsakos Energy Navigation Ltd Cum Red Perp Pfd Registered Shs Series E (TNP.PE) and Tsakos Energy Navigation Ltd Cum Red Perp Pfd Shs Series F (TNP.PF) each have a fixed to floating rate feature that provides protection against rising interest rates. TNP.PE (see prospectus) has a 9.25% coupon and now yields 11.2% at a recent price of $20.68. TNP.PE switches to a floating rate of 3-month LIBOR +6.881% if it is not called by 5/28/2027. TNP.PF (see prospectus) has a 9.5% coupon and now yields 11.1% at a recent price of $21.40. TNP.PF switches to a floating rate of three-month LIBOR +6.54% if it is not called by 7/30/2028. Many income investors are concerned about increasing interest rates. This type of fixed/floating rate preferred stock issue is extremely popular with my Panick High-Yield Report members.
1. Tanker rates have rebounded
While shipping rates were miserable for the first nine months of 2018, they already had soared by 11/30/2018 when TNP reported Q3 earnings. Some shipping rates had increased to more than 5X their level for the first nine months of 2018. As noted in the Q3 earnings report:
"In particular, VLCCs in the first nine months of the year averaged about $12,615 per day while today they are at over $56,000. Suezmaxes, during the same period, were at about $8,000 per day and now at $44,000. Similarly, Aframaxes from just over $9,000 per day during the first nine months of 2018 are today over $28,000."
Rates have declined somewhat (as was expected due to seasonal factors) from what was reported on the Q3 conference call, but remain at profitable levels. The Compass Maritime Weekly Report now lists 12-month charter rates as $34,000 per day for VLCCs, $24,000 per day for Suezmaxes and $18,500 per day for Aframaxes. 2018 was a record for scrapping older tankers, and this helped to reduce excess supply. Some analysts expect that the bullish cycle for tankers will run through 2021.
2. The huge cash hoard
Liquidity always is an important consideration for preferred stock investors. TNP wisely hoarded cash during better times and was well prepared for the downturn in shipping rates. TNP reported balance sheet cash of $232.6 million as of 9/30/2018.
3. Majority insider ownership
As of 4/12/2018, the Tsakos family owned approximately 53 million shares or 62% of TNP. They also owned approximately 864,000 shares of preferred stock. See page #113 of the 2017 annual report for details of their complex ownership structure. TNP is essentially a family company. It's very comforting for preferred stock investors to see such heavy insider ownership.
4. Focus on long term leases reduces risk
A balanced mix of short-term and long-term charters enabled TNP to outperform the spot market. This helps to reduce risk for preferred stock investors should there be another downturn. As noted in the Q3 2018 earnings report:
"The daily time charter equivalent rate per vessel for the Company's fleet was $17,155 with utilization again at a high 96.2% because of the Company's diversified tonnage and chartering strategy. TEN outperformed the spot market by over 60% in the first nine months of 2018."
5. Tanker shipping rates are likely to remain high
Even with a recent rebound from its December lows, oil remains moderately priced. Moderate oil prices help to drive strong demand to ship oil. Increasing US oil exports are especially favorable for strong tanker rates. Oil shipping routes from the US to typical destinations such as China are quite lengthy. This is very positive for shipping rates.
6. 1.7X preferred dividend coverage
TNP reported EBITDA of $124.5 million for the first nine months of 2018. Interest and preferred stock dividends totaled $74.2. Therefore, the preferred stock dividend coverage was 1.7X. This was during a period when tanker rates hit historical lows. Preferred stock dividend coverage should be far better for Q4 and 2019.
What are the major risks?
See pages #138-140 of the annual report for an extensive discussion of market risks. Here are the major risks as I see them. Tanker rates are now at very favorable levels, and TNP utilizes long-term contracts to protect itself somewhat from unexpected drops in shipping rates. A recession or economic slowdown could decrease the demand for oil and cause shipping rates to drop. TNP has significant balance sheet leverage. The equity market capitalization is $285 million as compared to debt of $1.6 billion and $450 million par value of preferred stock.
Conclusions
This is a good time to consider the TNP preferred stock issues as they remain at depressed levels despite the recent increase in tanker rates. There's little doubt that the TNP.PB and TNP.PC "failure to redeem" issues will be redeemed by their respective failure to redeem deadlines. These issues offer attractive returns with less risk than the other preferred issues. For those willing to take a little more risk, I recommend TNP.PE. TNP.PE offers the highest yield at current prices and the floating rate feature is superior to the floating rate feature offered by TNP.PF. TNP.PD is not of interest at current prices. It has a lower yield than TNP.PE and lacks the valuable floating rate feature. TNP offers a 6.2% yield with more risk than the preferred stocks. While the common stock has the most risk and the lowest yield, it could appreciate the most if strong tanker rates continue for an extended period of time as some analysts expect.
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